02 SMH Money Market

7/21/2019 02 SMH Money Market

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Prof. Shashank M Hiremath Prof. Shashank M Hiremath

[email protected] [email protected]

mailto:[email protected]






DefinitionDefinition

RBIRBI definesdefines thethe moneymoney marketmarket as,as, ‘A‘A marketmarket

forfor shortshort--termterm financialfinancial assetsassets thatthat areare closeclose

toto substitutessubstitutes forfor money,money, facilitatesfacilitates thetheexchangeexchange of of moneymoney forfor newnew financialfinancial claimsclaims inin

thethe primaryprimary marketmarket asas alsoalso forfor financialfinancial claims,claims,

alreadyalready issued,issued, inin thethe secondarysecondary market’market’..

Prof. Shashank M Hiremat h



Money MarketMoney Market

ShortShort--termterm fundsfunds notnot exceedingexceeding oneoneyearyear..

CurrentCurrent businessbusiness operations,operations,workingworking capitalcapital requirementsrequirements andandshortshort periodperiod requirementsrequirements of of thethegovernmentgovernment..

InstrumentsInstruments likelike billsbills of of exchange,exchange,

treasurytreasury bills,bills, commercialcommercial papers,papers,certificatecertificate of of depositsdeposits etcetc..

LargeLarge amountamount forfor eacheach instrumentinstrument..

CentralCentral && commercialcommercial banksbanks playplaydominantdominant rolerole..

InstrumentsInstruments generallygenerally dodo notnot havehavesecondarysecondary marketsmarkets..

TransactionsTransactions overover--thethe--phonephone andandtherethere isis nono formalformal placeplace..

TransactionsTransactions areare conductedconducted withoutwithoutthethe helphelp of of brokersbrokers..

Capital MarketCapital Market

LongLong--termterm fundsfunds exceedingexceeding oneone

yearyear.. FinancingFinancing fixedfixed capitalcapital

requirementsrequirements forfor tradetrade andand

governmentgovernment..

InstrumentsInstruments likelike shares,shares,

debentures,debentures, bondsbonds etcetc.. SmallSmall amountamount forfor eacheach instrumentinstrument..

DevelopmentDevelopment banksbanks && insuranceinsurance

companiescompanies playplay dominantdominant rolerole..

GenerallyGenerally havehave secondarysecondary marketsmarkets..

TransactionsTransactions taketake placeplace atat formalformal

place,place, likelike stockstock exchangeexchange..

TransactionsTransactions havehave toto bebe conductedconducted

onlyonly throughthrough authorizedauthorized dealersdealers..




Features of a Developed Money MarketFeatures of a Developed Money Market

HighlyHighly organizedorganized bankingbanking systemsystem..

PresencePresence of of aa centralcentral bankbank..

AvailabilityAvailability of of properproper creditcredit instrumentsinstruments..ExistenceExistence of of subsub--marketsmarkets..

AmpleAmple resourcesresources..

ExistenceExistence of of secondarysecondary marketmarket..DemandDemand andand supplysupply of of fundsfunds..




Importance of Money MarketImportance of Money Market

DevelopmentDevelopment of of tradetrade andand industryindustry..

DevelopmentDevelopment of of capitalcapital marketmarket..

SmoothSmooth functioningfunctioning of of commercialcommercial banksbanks..EffectiveEffective centralcentral bankbank controlcontrol..

FormulationFormulation of of suitablesuitable monetarymonetary policypolicy..

NonNon--inflationaryinflationary sourcesource of of financefinance totogovernmentgovernment..




Composition of Money MarketComposition of Money Market

CallCall moneymoney marketmarket..

CommercialCommercial billsbills marketmarket orordiscountdiscount marketmarket..

AcceptanceAcceptance marketmarket..

TreasuryTreasury billbill marketmarket..




Call Money MarketCall Money Market

OperationsOperations inin callcall moneymoney marketmarket..

CallCall loanloan marketmarket transactionstransactions && participantsparticipants..




Call Money MarketCall Money Market --

Advantages & DisadvantagesAdvantages & Disadvantages

AdvantagesAdvantages::--

HighHigh liquidityliquidity..

HighHigh profitabilityprofitability..

MaintenanceMaintenance of of SLRSLR.. SafeSafe andand cheapcheap..

AssistanceAssistance toto centralcentral bankbank operationsoperations..

DrawbacksDrawbacks::--

UnevenUneven developmentdevelopment..

LackLack of of integrationintegration..

VolatilityVolatility inin callcall moneymoney ratesrates..




Commercial Bills Market or Discount MarketCommercial Bills Market or Discount Market

SectionSection 55 of of thethe NegotiableNegotiable InstrumentsInstruments ActAct

definesdefines aa billbill of of exchangeexchange as,as, ‘An‘An instrumentinstrument inin

writingwriting containingcontaining anan unconditionalunconditional order,order,signedsigned byby thethe maker,maker, directingdirecting aa certaincertain sumsum of of

moneymoney onlyonly to,to, oror toto thethe orderorder of of aa certaincertain

personperson oror toto thethe bearerbearer of of thethe instrument’instrument’..




Commercial Bills Market or Discount MarketCommercial Bills Market or Discount Market

DemandDemand oror sightsight billsbills andand UsanceUsance oror timetime billsbills..

CleanClean billsbills andand documentarydocumentary billsbills..

InlandInland billsbills andand foreignforeign billsbills..

ExportExport billsbills andand importimport billsbills..

IndigenousIndigenous billsbills..

AccommodationAccommodation billsbills andand supplysupply billsbills..




Operations in bill marketOperations in bill market

DiscountDiscount marketmarket..

AcceptanceAcceptance marketmarket..




Commercial Bills Market or Discount MarketCommercial Bills Market or Discount Market – –

Advantages & DisadvantagesAdvantages & Disadvantages

AdvantagesAdvantages

Liquidity.Liquidity.

Self Self--liquidating andliquidating and

negotiable asset.negotiable asset.

Certainty of payment.Certainty of payment.

Ideal investment.Ideal investment.

Simple legal remedy.Simple legal remedy.

High and quick yield.High and quick yield. Central bank control.Central bank control.

DisadvantagesDisadvantages

Absence of bill culture.Absence of bill culture.

Absence of rediscounting amongAbsence of rediscounting among

banks.banks.

Stamp duty.Stamp duty.

Absence of secondary market.Absence of secondary market.

Difficulty in ascertaining genuineDifficulty in ascertaining genuine

trade bills.trade bills. Limited foreign trade.Limited foreign trade.

Absence of acceptance services.Absence of acceptance services.

Attitude of banks.Attitude of banks.




Bill Market SchemeBill Market Scheme

New New Bill Bill Market Market Scheme Scheme 1970 1970..




Treasury Bill MarketTreasury Bill Market

AA promissorypromissory notenote issuedissued byby thethe GovernmentGovernmentunderunder discountdiscount forfor aa specificspecific periodperiod statedstated

thereintherein..

TheThe periodperiod doesdoes notnot exceedexceed oneone yearyear..

TypesTypes of of treasurytreasury billsbills inin IndiaIndia areare OrdinaryOrdinary //

regularregular treasurytreasury billsbills andand AdAd hochoc treasurytreasury billsbills..

1414 daysdays treasurytreasury billsbills..







Operations and participantsOperations and participants

RBIRBI andand SBISBI..CommercialCommercial banksbanks..

StateState governmentsgovernments..

DFHIDFHI..STCISTCI..

FinancialFinancial institutionsinstitutions likelike LIC,LIC, GIC,GIC,

UTI,UTI, IDBI,IDBI, ICICI,ICICI, IFCI,IFCI, NABARDNABARD etcetc..CorporateCorporate customerscustomers..

PublicPublic..




Importance or Merits of Treasury BillsImportance or Merits of Treasury Bills

SafetySafety..LiquidityLiquidity..

IdealIdeal forfor shortshort--termterm investmentinvestment..

IdealIdeal forfor fundfund managementmanagement..

StatutoryStatutory liquidityliquidity requirementrequirement..

SourceSource of of shortshort--termterm fundsfunds..

NonNon--inflationaryinflationary monetarymonetary tooltool..

HedgingHedging facilityfacility..




Demerits of Treasury BillsDemerits of Treasury Bills

PoorPoor yieldyield..

AbsenceAbsence of of competitivecompetitive bidsbids..AbsenceAbsence of of activeactive tradingtrading..




Money Market InstrumentsMoney Market Instruments

CommercialCommercial paperspapers..

CertificateCertificate of of depositdeposit..

InterInter--bankbank participationparticipation certificatescertificates..

RepoRepo instrumentsinstruments..

TreasuryTreasury billsbills..

MoneyMoney atat callcall..CommercialCommercial billsbills..




Commercial PapersCommercial Papers

TheyThey areare unsecuredunsecured promissorypromissory notesnotes issuedissued withwith aafixedfixed maturitymaturity byby aa companycompany approvedapproved byby RBI,RBI,negotiablenegotiable byby endorsementendorsement andand delivery,delivery, issuedissued ininbearerbearer formform andand issuedissued atat suchsuch discountdiscount onon thethe facefacevaluevalue asas maymay bebe determineddetermined byby thethe issuingissuingcompanycompany..

InIn 19801980ss companiescompanies foundfound itit cheapercheaper toto borrowborrowmoneymoney directlydirectly fromfrom publicpublic..

ParticipantsParticipants::IssuersIssuers-- allall privateprivate companies,companies, publicpublic sectorsector companies,companies,

nonnon--bankingbanking companiescompanies etcetc..

InvestorsInvestors-- individuals,individuals, banks,banks, corporatescorporates && NRI’sNRI’s..




Advantages of Commercial PapersAdvantages of Commercial Papers

SimplicitySimplicity..

FlexibilityFlexibility..

DiversificationDiversification..EasyEasy toto raiseraise longlong--termterm capitalcapital..

HighHigh returnsreturns..

MovementMovement of of fundsfunds..




Commercial Papers in other countriesCommercial Papers in other countries

19201920ss inin USAUSA.. NowNow itit isis largestlargest commercialcommercial paperpaper

marketmarket inin thethe worldworld.. MaturityMaturity lessless thanthan 270270 daysdays..

19501950ss inin Canada,Canada, maturitymaturity fromfrom 3030 toto 365365 daysdays..

19851985 inin France,France, maturitymaturity fromfrom 1010 daysdays toto 77 yearsyears..

19861986 inin UK,UK, SterlingSterling commercialcommercial paperpaper marketmarket

waswas launchedlaunched.. MaturityMaturity fromfrom 77 toto 364364 daysdays..

19871987 inin Japan,Japan, YenYen commercialcommercial paperpaper marketmarket waswaslaunchedlaunched.. MaturityMaturity fromfrom 22 weeksweeks toto 99 monthsmonths..

19801980ss inin Sweden,Sweden, 19821982 inin SpainSpain && HongHong Kong,Kong,

19841984 inin SingaporeSingapore && NorwayNorway..Prof. Shashank M Hiremat h



Commercial Papers in IndiaCommercial Papers in India RecommendationsRecommendations of of VaghulVaghul WorkingWorking GroupGroup..

19891989 RBIRBI announcedannounced thethe launchlaunch of of commercialcommercial paperpaper..LaunchedLaunched onon JanuaryJanuary 11stst,, 19901990..

CanCan bebe issuedissued byby aa companycompany onlyonly if if tangibletangible netnet worthworth isis

notnot lessless thanthan RsRs..1010 crorescrores asas perper latestlatest balancebalance sheetsheet..

FundFund basedbased workingworking capitalcapital of of RsRs..2525 crorescrores oror moremore..

ShallShall notnot exceedexceed 2020%% of of fundfund--basedbased workingworking capitalcapital..

IssuedIssued inin multiplesmultiples of of RsRs..2525 lakhslakhs butbut minimumminimum

investmentinvestment byby aa singlesingle investorinvestor isis RsRs..11 crorecrore..

MaturityMaturity periodperiod of of 77 daysdays toto 66 monthsmonths..

IssuedIssued inin thethe formform of of UsanceUsance promissorypromissory notes,notes,

negotiablenegotiable byby endorsementendorsement andand deliverydelivery..Prof. Shashank M Hiremat h



Certificate of Deposit (CD)Certificate of Deposit (CD)

ShortShort--termterm depositdeposit instrumentsinstruments issuedissued byby banksbanks andandfinancialfinancial institutionsinstitutions toto raiseraise largelarge sumssums of of moneymoney..

CDsCDs areare issuedissued inin thethe formform of of UsanceUsance promissorypromissory

notesnotes.. IssuersIssuers areare commercialcommercial banksbanks && financialfinancial institutionsinstitutions..

IssuedIssued inin multiplesmultiples of of RsRs..55 lakhslakhs butbut minimumminimum

investmentinvestment byby aa singlesingle investorinvestor isis RsRs..2525 lakhslakhs..PeriodPeriod rangingranging betweenbetween 33 monthsmonths toto 11 yearyear..

MinimumMinimum locklock--inin periodperiod isis 4545 daysdays..




InterInter--Bank Participation certificateBank Participation certificate

InIn 19881988 RBIRBI GovernorGovernor tooktook thethe proposalsproposals fromfrom

banksbanks toto meetmeet thethe shortshort--termterm needsneeds..

SchemeScheme isis confinedconfined toto scheduledscheduled commercialcommercial

banksbanks onlyonly..

ParticipationParticipation isis restrictedrestricted toto minimumminimum 9191 daysdays

andand maximummaximum 180180 daysdays..

LendingLending underunder ‘with‘with risk’risk’ andand ‘without‘without risk’risk’..




Repo instrumentsRepo instruments

TheThe costcost of of borrowingborrowing isis calledcalled RepoRepo RateRate..

RepoRepo transactionstransactions areare conductedconducted toto manipulatemanipulate

shortshort--termterm interestinterest raterate andand managemanage liquidityliquidity

levelslevels..

TheThe securitiessecurities usedused forfor reporepo transactionstransactions areare

governmentgovernment securities,securities, treasurytreasury billsbills andand publicpublic

sectorsector bondsbonds..

ReserveReserve reporepo transactionstransactions areare donedone toto injectinject

freshfresh fundsfunds inin thethe marketmarket..




Features or deficiencies ofFeatures or deficiencies of

Indian Money MarketIndian Money Market

ExistenceExistence of of unorganizedunorganized sectorsector..

AbsenceAbsence of of integrationintegration..

DiversityDiversity inin moneymoney ratesrates of of interestinterest..

SeasonalSeasonal stringencystringency of of fundsfunds..

AbsenceAbsence of of billbill marketmarket..

NoNo contractcontract withwith foreignforeign moneymoney marketsmarkets..

LimitedLimited instrumentsinstruments..

LimitedLimited secondarysecondary marketmarket..

LimitedLimited participantsparticipants..




Recent developments in money marketRecent developments in money market

IntegrationIntegration of of unorganizedunorganized sectorsector withwith thethe organizedorganized sectorsector..

WideningWidening of of callcall moneymoney marketmarket..

IntroductionIntroduction of of innovativeinnovative instrumentsinstruments..

OfferingOffering of of marketmarket ratesrates of of interestinterest..

PromotionPromotion of of billbill cultureculture..

EntryEntry of of MoneyMoney MarketMarket MutualMutual FundsFunds (MMMFs)(MMMFs)..

SettingSetting upup of of creditcredit ratingrating agenciesagencies..

AdoptionAdoption of of suitablesuitable monetarymonetary policypolicy..

EstablishmentEstablishment of of DiscountDiscount andand FinanceFinance HouseHouse of of IndiaIndia (DHFI)(DHFI) inin19881988..

SettingSetting upup of of SecuritiesSecurities TradingTrading CorporationCorporation of of IndiaIndia LtdLtd (STCI)(STCI)..

IntroductionIntroduction of of NonNon--CumulativeCumulative DebenturesDebentures (NCDs)(NCDs)..




Discount and Finance House of India (DFHI)Discount and Finance House of India (DFHI)

EstablishedEstablished inin AprilApril 19881988..

JointJoint--stockstock companycompany andand jointly jointly ownedowned byby RBI,RBI,PublicPublic sectorsector banksbanks && allall IndiaIndia financialfinancial institutionsinstitutions

whichwhich havehave contributedcontributed itsits paidpaid--upup capitalcapital of of RsRs..150150

crorescrores..ParticipatesParticipates inin call,call, noticenotice && termterm moneymoney marketmarket asas

lenderlender && borrowerborrower..

SaleSale andand purchasepurchase of of 182182 daysdays TT--billsbills..

BillsBills areare discounteddiscounted && rediscountedrediscounted..

ConstitutesConstitutes 1010%% toto 1515%% of of totaltotal moneymoney marketmarket

resourcesresources..




Functions of DFHIFunctions of DFHI

Discounting,Discounting, rediscounting,rediscounting, buying,buying, selling,selling,underwritingunderwriting etcetc..

DealsDeals inin treasurytreasury bills,bills, commercialcommercial bills,bills,

commercialcommercial papers,papers, promissorypromissory notesnotes etcetc..

Lending,Lending, borrowing,borrowing, brokingbroking..

PromotePromote andand supportsupport companycompany fundsfunds..

AdvisorAdvisor forfor government,government, banks,banks, financialfinancial

institutionsinstitutions etcetc inin expansionexpansion of of moneymoney marketmarket..

Prof Shashank M Hiremat h

02 SMH Money Market

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